By Jack Rasmus
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Hang on to your economic crisis hat. The recession that never really ended is coming back. Economic recovery under the Obama administration has been the weakest recovery on record of all the 11 recessions in the U.S. since 1945. It has also proven to be the most lopsided recovery, benefiting investors, corporations, and the wealthiest 10 percent.
According to the Minneapolis district of the U.S. Federal Reserve Bank, 13 quarters after their pre-recession peak, total U.S. economic output for the two worst prior U.S. recessions—i.e., 1973-75 and 1981-82—had risen by 6 percent and 10 percent, respectively. For the 2007-09 recession, 13 quarters after the peak, total output has risen only 0.5 percent. Similarly for consumption, which makes up 70 percent of the economy. Since December 2007, it has grown a paltry 0.5 percent in real terms as well, according to a recent assessment by Moody’s Inc. chief economist, Stephen Roach. As Roach put it in a Financial Times guest editorial this past June, “Never before in the post-second world war era have U.S. consumers been this weak for this long.” Roach’s statement undoubtedly holds true for the bottom 90 percent of consumer households. But the wealthiest 10 percent households now account for 60 percent of all consumption in the U.S., according to some estimates, which means the 0.5 percent real rise to which he refers is actually a negative number for the bottom 90 percent.
A comparison of recessions shows the following: 12 months after the official end of the 1973-75 recession, the economy was growing by 6 percent a quarter and 3.2 percent a quarter in the second 12-month period. For the 1981-82 recovery period, it grew 7.75 percent a quarter in the first 12 months and by 5.6 percent per quarter in the second 12 months. In contrast, for the Obama recovery of the past two years, the economy grew only 3 percent in the first 12 months following the end of the recession and then only 2 percent in the next 12 months. (For the first half of 2011, the Obama recovery is averaging between 1.5 percent -1.8 percent.)
This is despite having provided a fiscal stimulus of $830 billion, $9 trillion on bank bailouts, hundreds of billions more bailing out non-bank companies like GM, AIG, and others, and at least another $300 billion in additional business-investor tax cuts just in the recent year. The picture is much worse for key sectors of the economy like housing and jobs.
In the two worst recessions—1973-75 and 1981-82—total employment rose by 5 percent over pre-recession levels after 42 months. Today, after 42 months, total employment is more than 5 percent below the level it was at the start in December 2007. Moreover, the 5 percent below does not count involuntary underemployment or workers who involuntarily leave the labor force because they can’t find work. If one were to count those categories, the short fall in total jobs after 42 months would be approximately 10 percent. That’s 17 million more still out of work, in addition to the 7.1 million at the start of the recession in 2007, for a total of 24 million still jobless after 42 months.
There have been at least three waves of foreclosures since 2007, driven first by subprime borrowers, then rising jobless numbers, and most recently by a growing tide of homeowners experiencing negative equity and abandoning homes worth far less than their mortgages cost. Foreclosures now approach 10 million, with some sources predicting 13-14 million before the current housing cycle bottoms. That’s about one-fourth of all mortgages in the U.S. The numbers for homes in negative equity are even greater, at around 16 million. New home construction is down 75 percent, as is the index for mortgage purchases. After having experienced a 25 percent decline in 2008-09, home prices have now fallen for the past 9 consecutive months—4.2 percent in just the first 3 months of 2011. From their peak in July 2006, home prices in 20 major cities have fallen by more than 60 percent.
After a collapse of employment of historic dimensions from mid-2008 through June 2009, the number of jobless rose by 206,000 for four consecutive months from June to September 2010. Also, the number of workers leaving the labor force, having given up finding a job, rose by another 235,000. By September 2010 there were 650,000 fewer workers with jobs than there were when the recession officially ended in June 2009. That first double dip in jobs in the summer 2010 was followed by a modest recovery of jobs for a short period after which job growth declined sharply once again.
A similar scenario describes the housing market. Residential housing experienced a collapse from 2007 through 2009, falling by double digit percentages every quarter except one. Only the first quarter following the end of the recession in June 2009 did a modest 10.2 percent recovery of housing occur. That was almost totally due to the introduction of the first-time homebuyers program. But even that program was not enough to sustain a housing recovery. Housing re-collapsed in the next two quarters. It was followed by another one quarter recovery in the spring of 2010, as homeowners rushed to take advantage of the first-time home buyers program before it was discontinued. But all the gains of that quarter were wiped out in the summer 2010 double dip. Residential housing has therefore already experienced a double dip, beginning in the first quarter of 2011. Residential housing now languishes 75 percent below its pre-recession high and there is no sign of recovery anywhere.
After a year of recovering a third to half of their losses from the 2007-09 recession, other economic sectors also stalled out. To note but a few: retail sales recovered only half of its prior decline by summer 2010 and business spending rose only 3 percent in the first half of 2010, after having fallen to post-1945 record of 6.7 percent in 2009. In the two prior worst recessions, 1973-75 and 1981-82, business spending slowed but never actually declined, i.e., went negative. By mid-2010, industrial production was still off 30 percent, as were durable goods and other key indicators. And after rising to 58 in the first quarter of 2010, the manufacturing activity index fell once again to 50 by July 2010, a level indicating no growth.
The Second Failed Recovery of 2010-2011
In the summer of 2010, the Obama administration, together with the Federal Reserve, attempted to prevent deflation. The Fed moved first, introducing what was called Quantitative Easing II (QE2). QE2 meant the Fed bought up $600 billion in bonds, mostly bad mortgage bonds and long term Treasury bonds, from investors at phony inflated rates. That pumped more money and liquidity directly into the economy.
QE2 had an impact, but not on jobs or housing recovery. It lowered the value of the U.S. dollar in global markets, thereby stimulating U.S. exports to some degree and the U.S. manufacturing sector indirectly in turn. However, only 74,000 manufacturing jobs were created between 2009-10, not all of which are attributable to the effects of dollar drive exports. No more than 3,000 jobs a month can be attributed to QE2. As for housing, QE2 was theoretically supposed to lower mortgage interest rates, but those rates actually rose after the introduction of QE2.
QE2 may have stimulated exports slightly (and jobs in manufacturing hardly at all), but it also served to feed a boom in speculative investing in oil, food, and other commodities from October 2010 to April 2011. This provoked price increases that crushed consumer spending and consumption, contributing to a double dip. Here’s how it worked. Banks borrowed from the Fed at an interest rate as low as 0.1 percent—i.e., free money. They loaned the funds to speculators like hedge funds, private equity firms, and others. The speculators then invested the loans in oil and other commodities, setting off price increases that devastated consumers. To the extent QE2 benefited manufacturing, it did so by benefiting only manufacturing corporations and shareholders. The double effect of slowing economies in China, Brazil, India, and elsewhere, combined with the end of QE2, meant that a manufacturing driven economic recovery in the U.S will not happen.
QE2’s greatest success was a second boomlet in the stock market with a surge in capital gains income for corporations, wealthy investors, and the wealthiest 10 percent of households. Commodities companies then led the stock recovery in the fall of 2010. In particular, it boosted the stocks of oil, energy, food, clothing, and metals manufacturers. Also, bank stocks gained significantly, borrowing from the Fed at 0.1 percent and loaning to speculators at 8 percent. Speculators then drove up the prices of the commodities, which, in turn, drove up the profits of manufacturers of commodity based products.
Efforts at further fiscal stimulus were half-heartedly undertaken, except for some further tax cuts for small business. In what will prove to be one of Obama’s great strategic errors, instead of taking the recovery a step further by proposing a stimulus targeting jobs and housing—largely left out in his first stimulus—Obama repeated what Jimmy Carter had done in 1978 when facing a similar situation. Like Carter, Obama was also trounced in the mid-term elections, as Democratic supporters from 2008 simply voted with their feet and stayed home in 2010.
An historical parallel to Obama’s 2010 mid-term electoral disaster is the 1934 mid-term elections. That year Franklin Roosevelt faced a similar stalling recovery after also having focused on bailing out the banks, raising corporate prices and profits, and taking minimal action to create jobs—the Civilian Conservation Corps notwithstanding. However, FDR and his advisors saw their mistake and created the New Deal (Social Security, Works Progress Administration, unionization and bargaining rights, minimum wage, etc.). They took this new vision to the people in the 1934 election and Roosevelt swept the field.
After the midterms, Obama’s main contribution to an additional fiscal stimulus was to extend the Bush tax cuts for two more years—80 percent of which benefited wealthy investors capital incomes and corporate profits at a cost to the federal government of between $200 to $270 billion a year. This extension coincided with the stock market recovery the Fed and QE2 engineered and the emerging commodities speculation boom that followed at the time. With the tax cut extension, investors would now reap capital gains from stocks, bonds, and commodities. Obama’s 2010 stimulus fiscal supplement also included a 2 percent cut in payroll taxes for workers earning less than $108,600 a year for one year. That payroll tax cut would cost the Social Security Trust Fund about $100 billion. Although producing a $2 trillion surplus since 1986, the Trust Fund after the 2007-09 recession was barely breaking even. Nevertheless, Obama’s new business-heavy corporate team of advisors had no intention of any job creation proposal.
The payroll tax was supposed to stimulate household consumption in 2011, but the oil and commodities inflation set off by the Fed’s QE2 and speculators would absorb and offset the consumption effects of the payroll tax cut. By April 2011, it was estimated that 60 percent of the payroll tax cut had been absorbed by rising gas and energy prices alone. Obama’s business advisor team followed in June with the idea that the share of payroll taxes paid by employers should also be cut—thus creating even greater stress on social security finances. All the payroll tax cuts accomplished was a transfer of money from the Social Security Trust Fund and retirees to oil companies and other speculators.
The 2011 Scenario
Whatever recovery has occurred since Obama entered office in 2009 has been due to what economists call inventory adjustment and export-driven manufacturing. But both are now slowing sharply. Recent months show clearly that manufacturing, driven largely by export sales, has hit a wall as the global economy is slowing. China, Brazil, India, and other global economies outside North America and Europe that buy U.S. manufactured exports have taken steps to slow their economies at least by half. Japan has already re-entered a new recession, as has Australia, the United Kingdom, and most of the periphery economies of the European Union. That means less buying of U.S. exports and a slowdown in manufacturing in the U.S. The other stimulant to exports, the declining value of the U.S. dollar, is also as low as it is likely to get. Given this scenario, it’s not surprising that in June manufacturing across various regions of the U.S. slumped to an almost two year low.
Consumption will also continue to slow in 2011 for all but the wealthiest 10 percent. Sales at high end retail stores, like Tiffany’s, Saks, and Nordstrom are registering record gains, while stores like Wal-Mart have experienced declining sales every quarter since early 2009. In terms of broader trends, consumption overall rose in the first three months of 2011 at an anemic 2.2 percent annual rate and is projected to drop below 2 percent in the second quarter in an undeniable downward drift. Real weekly earnings continue to fall, meaning less real consumption spending as prices for gasoline, food, health care, education and local taxes continue to soar.
Inventory accumulation by business has also run its course. With consumers pulling back on spending and consumer confidence again 40 percent below its 2007 peak, it is not likely businesses will add to inventories in 2011 in expectation of more consumer spending that does not appear will be forthcoming. Residential housing, and its close cousin commercial property, are so low they probably will not decline further appreciably. Nor will they improve, on the other hand, to offset faltering sectors of the economy elsewhere.
On the jobs front, several strongly negative signs have appeared thus far in 2011. More than 400,000 workers left the labor force in the first quarter. Only a net 14,000 full time workers were added between December and May. Many of the private sector jobs gains have been part time and temp workers. In May, only 54,000 jobs were added to the economy, barely covering a third of new entrants to the labor force. Half the job creation comes from small businesses in the U.S., and recent surveys conducted by the National Association of Independent Business show more small businesses are now planning to cut payrolls than expand them in the months ahead. The May survey showed the worst hiring prospects since September 2010. Meanwhile, state and local governments layoffs have continued to rise at around 25,000 a month. That’s more than 300,000 a year, a figure that will no doubt go higher over the course of this year. All this before the federal government starts major layoffs later in 2011 and 2012 when budget cuts are implemented in earnest.
Meanwhile, total business spending on equipment and structures has hardly grown, with the latter offsetting the former. The largest U.S. corporations continue sitting on their $2 trillion in cash and liquid assets and refuse to invest in the U.S. to create jobs. All levels of U.S. government—state, cities, counties, school districts, and the Federal government as well—are engaging in spending cuts, which will further negate an already deteriorating economic recovery. In short, there is little if anything on the economic horizon to suggest any source for renewed economic growth and recovery.
Who Benefitted From the Obama Recovery?
In the two years since the Obama recovery began, stocks of the largest S&P 500 corporations have more than doubled in value from $6 trillion to $12.3 trillion. This has been the biggest stock value run-up since 1982. Also the fastest in 60 years. Bonds have done even better. High yield grade bonds rose 20 percent in price in 2009, followed by a 57 percent increase in 2010, and a projected additional 25 percent rise this year.
Corporate profits are now $200 billion higher than they were at their peak in 2006 at $1.7 trillion. And that does not count another $1 trillion multinational corporations admit they are holding in their offshore subsidiaries. Some independent sources estimate this offshore profits hoarding are as high as $1.5 trillion. The historic average rate of return for profits in the U.S. has been around 10 percent. Yet profits rose 243 percent in 2009 and another 61 percent in 2010. Profit margins are at an 80 year high, driven not so much by increased sales as by constant cost cutting—which means layoffs, reduced benefits, lower wages, and fewer hours of work.
Corporations continue to sit on $2 trillion cash hoards and it seems likely they will spend most of it on stock buybacks, higher dividend payouts, mergers and acquisitions of competitors, and speculation in derivatives and swaps, foreign currencies, and the like—all of which create no jobs whatsoever and, in many cases, will mean fewer jobs. The CEOs of S&P 500 companies have seen their compensation double, as stock prices on average have doubled and stock awards constitute 53 percent of their total compensation. Not least, the chiefs of the big banks are enjoying handsome bonuses, and total pay hikes of 36 percent.
Meanwhile, real earnings continue to fall for 90 million workers and middle class households, foreclosures approach 10 million going to 13-14 million, and banks seize homes at a rate of almost 100,000 a month and 16 million homeowners confront negative equity. Having already experienced the destruction of their pension plans, replaced with 401ks that provide less than half a normal pension, private sector workers are now giving up their deferred future social security wages, through Obama’s payroll tax cuts, so they can pay for rising gas and food prices. Public employees have fared no better, now having their pensions taken away as well as the right to collectively bargain on benefits in general. Not least, 24 million workers still remain without jobs. And the double dip looms on the horizon.
Jack Rasmus is author of Epic Recession: Prelude to Global Depression (2010) and the forthcoming Obama’s Economy: Recovery for the Few (late 2011). His website is www.kyklosproductions.com.
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